Strategic Management Responsibility: Corporate Governance Issues ... Corporate governance and relationship, Best Practices, management, and shareholders.

1. Corporate Governance
Best Practices:
Implications for Commercial Underwriters
Adel Abouhana

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3. Corporate Governance

Core concern: How do we make sure
that top managers are doing what they’re
supposed to be doing?
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4. The Agency Perspective

Separation of ownership & control
◦ Principals & agents
◦ Misalignment of interests
 What’s good for the managers may not be what is
good for the owners
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5. The Stakeholder Perspective

The board has broader responsibilities
◦ Focus is on protecting key stakeholder rights
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Shareholders
Employees
Vendors
Customers
Society as a whole
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6. Best Practices
The board of directors
 Executive compensation
 Anti-takeover measures

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7. The Board of Directors
Role is to monitor & evaluate top
management
 But, is the board a complete solution?

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8. Best Practices:
Board of Directors
 Separate CEO & Chairman of the Board
◦ Role duality gives CEO too much power
Appointment of lead outside director
 Former CEO does not continue to sit on
the board

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9. Best Practices:
Board of Directors

Active board members
◦ Not a rubber-stamp board
Evidence that the directors are in contact with
employees, vendors, & customers
 Board composition

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Size
Age
Diversity
Expertise
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10. Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders
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11. Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders
◦ “Having a board monitor itself is like having
the fox watch the henhouse.”
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12. Best Practices:
Board of Directors
 Board composition
◦ Insiders versus outsiders
◦ “Having a board monitor itself is like having
the fox watch the henhouse.”
◦ The majority should be independent
◦ Should have formal resolution requiring this
AND a written definition of independence
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13. Best Practices:
Board of Directors
 Board composition
◦ What is meant by “independent”?
 No material relationship with the company, either
directly or as a partner, shareholder or officer of a
firm that has a relationship with the company
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14. Best Practices:
Board of Directors
 Board composition
◦ What is meant by “independent”?
 Five year “cooling off” period before can be
considered independent:
 Former employees of the firm
 If formerly part of an interlocking directorate in which an
executive of the firm sat on the compensation committee of
the firm employing the director
 Same applies to directors with immediate family members in
the above categories
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15. Best Practices:
Board of Directors
 Board members (insiders & outsiders)
◦ Limits on number of other board
memberships
 Average director spends 176 hours a year for each
board position
◦ CEOs should not serve on each other’s
boards (interlocking directorates)
◦ Directors & their firms barred from doing
consulting, legal, or other work for the firm
◦ Significant stock ownership of firm by
directors
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16. Best Practices:
Board of Directors
 Board committees
◦ Key committees at least chaired by outsiders
 Audit, compensation, corporate governance
(nominating) committees
◦ Preferred: Key committees composed entirely
of independent directors
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17. Best Practices:
Board of Directors
 Board committees
◦ Compensation committee
 Conduct formal evaluation of all company officers
(including CEO) and set compensation
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18. Best Practices:
Board of Directors
 Board committees
◦ Corporate governance (nominating)
committee
 Create charter for board
 Conduct formal governance review using an
external consultant
 Nominate board members
 Board term limits
 Elections
 One class of directors
 Each director stands for re-election each year
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19. Best Practices:
Board of Directors
 Board committees
◦ Audit committee
 Select independent auditor
 Not also employed for consulting work
 Do not seek SEC exemption to do so
 Rotate auditors – at least rotate the lead auditor, if
not the entire firm, every 5 years
 CEO & CFO should not be former employees of
the auditing firm
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20. Best Practices:
Board of Directors
 Board meetings
◦ Frequency of overall board & committee
meetings
◦ Attendance
◦ “Executive” sessions
 Lead outside director with term limits
◦ Risk assessment function
 Reports identifying risks & methods of addressing
◦ Access to internal information
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21. Best Practices:
Executive Compensation
 CEO has substantial stock ownership
 Salary, bonuses, & stock options reward
superior performance
◦ not size of the company
AND penalize poor performance
 No modification of performance goals

◦ No re-pricing or swapping stock options

Expense stock options
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22. Best Practices:
Anti-takeover measures
 Lack of provisions designed to thwart a
hostile takeover
◦ Golden parachutes
◦ Poison pill provisions
◦ Greenmail
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